Microsoft Hits Back as Google Muscles In

Microsoft Corp. MSFT +2.65% has publicly dismissed Web-based Google Apps as a competitor to its Office software suite. But, behind the scenes, Microsoft is stepping up its efforts to halt Google Inc.'s GOOG +1.06% encroachment on its business-software turf.

In recent months, Microsoft has cut prices, boostedits commissions to resellers and changed how it pitches Office 365, a Web-based version of products including Microsoft Word, Outlook email and PowerPoint.

On Monday, Microsoft is expected to announce a next-generation version of Office, its single-biggest profit engine, exceeding even its Windows operating system.

Microsoft also is lavishing attention on businesses that have weighed switching to Google Apps, a corporate-software bundle that includes versions of Gmail and the Google Docs document, spreadsheet and presentation software.

To counter Google's momentum, Microsoft is using a "Google Compete" team, whose mission is to keep Office customers from buying Google Apps.

Marketing company Dominion Enterprises, of Norfolk, Va., was a target of Microsoft's anti-Google offensive.

Before and after Dominion installed Google Apps for its 4,000 employees last summer, Microsoft invited the company's chief information officer, Joe Fuller, to its Redmond, Wash., headquarters in a bid to win him over.

For two days last month at Microsoft's executive briefing center, Mr. Fuller and his colleagues were shown road maps of Microsoft products, toured a research lab, and saw new technologies, including one that lets shoppers virtually try on clothes, he said.

Mr. Fuller said he was impressed, but that Office 365 was 50% more expensive than Google Apps, and it was "not as cool" as Google's software.

Dominion halted its $2 million-a-year Microsoft contract that included software to support Office, as well as back-end server and database software Dominion continues to buy.

The company now pays $200,000 a year for Google Apps, though it hasn't replaced all the services Dominion gets from Microsoft.

"Google Apps is serving us well," Mr. Fuller said.

Dominion's switch underscores why Microsoft is ramping up its efforts against Google Apps, in what people familiar with Microsoft's strategy said are its most serious moves to date to protect Office.

"We take all competition seriously," said Microsoft spokesman Frank Shaw, who added that the company's moves haven't been a reaction to Google Apps.

"People finally have a real choice when it comes to business technology," Amit Singh, vice president of Google Enterprise, said in a statement.

So far, there are few signs Microsoft Office is being seriously dented by Google Apps.

Office continues to have more than a 90% market share for "business-productivity software," as the category is known, and more than an 80% share of corporate email, according to research firm Gartner Inc.

Microsoft's Office division also remains financially strong, delivering the biggest chunk of revenue and profits to the company.

For the nine months ended March 31, the division generated operating profit of $11.6 billion, or more than half of the company's total operating profit for the period.

Yet Microsoft appears to be ceding ground to Google in some respects.

In a May report, Gartner said Google is winning one-third to half of new corporate users that are paying for Web-based software. In 2009, Gartner predicted that Microsoft by now would be outselling Google Apps by at least 4 to 1.

That could hurt Microsoft as many companies refashion themselves for the era of "cloud" computing, a Google-backed approach in which software is easily accessed online and sold as a subscription product, rather than installed on companies' computers.

"All of a sudden this looks really serious," Gartner analyst Tom Austin said. "By all accounts, [Microsoft] should be burying Google, and they're not."

Microsoft's Mr. Shaw said, "It is a long race, and we feel good about the products we're delivering."

In some instances, Microsoft is acknowledging the threat to its business-software franchise. "Suffice it say that Google has won some big customers lately," including retailer Costco Wholesale Corp. COST +0.84% and drug giant Roche Holding AG, ROG.VX +0.96% Microsoft executive Tim Pash told resellers during a May webcast. "We view that as a very serious threat to the company."

Mr. Pash added that business software is "Microsoft's birthright," and promised "a very strong response" to Google in the new fiscal year that started July 1.

Microsoft began stepping up its campaign against Google Apps in March, when it cut Office 365 prices by as much as 20% for most big companies and universities, the kinds of customers that analysts say have resisted Microsoft's cloud email and productivity software.

Microsoft said it passed on to customers its lower cost for supplying Office 365.

For those users, Microsoft has reduced the yearly cost of Office 365 with most features to the equivalent of $96 a person from $120 a person. Small companies can sign up for basic elements of Office 365 for as little as $48 a year per user.

Google Apps charges $50 per user each year, though some business customers may pay less if they sign on through a reseller.

The Microsoft and Google services don't have identical features, and Microsoft says there are hidden costs for many businesses to make Google Apps work properly.

Last week, Microsoft announced changes in sales incentives for Office 365 that closed the gap with Google Apps.

Independent software vendors that sell Microsoft products now can earn commissions of as much as 23% on the first year of Office 365 sales to some companies, topping Google Apps' commission of 20%.

Microsoft says its software-selling partners asked for the changes.

At an event in Toronto last week with software vendors, Microsoft Chief Operating Officer Kevin Turner said Office 365 "is our collective future. And make no mistake, Google is out there pitching our customers."

http://online.wsj.com/article/SB10001424052702303644004577525383396956086.html